Suckers Wanted: How Car Dealers and Other Businesses are Taking Away Your Right to Sue

Mandatory arbitration provisions, forcing people to waive their legal rights, have become standard fare in consumer contracts. Now, Congress is beginning to push back?and the business community is mobilizing for a fight.

Our car is old. The 1993 Honda Accord has more than 145,000 miles on it, but it's paid for and still runs pretty well despite the rust. But this year my husband and I decided the time had come for an upgradenot a new car, of course, but newer than the one we're currently driving. Something with airbags.

The perils of buying a used car have been well documented, and the industry sleaze is so ubiquitous that it's inspired a handful of Hollywood movies (see the classic 1980 flick Used Cars, starring Kurt Russell) and a genre of jokes ("How can you tell when a car dealer is lying? His lips are moving."). So we approached the whole ordeal with trepidation. But after months of research and anguish, we finally decided to pull the trigger on a "certified pre-owned" 2007 Volkswagen Passat Wagon, which we found at the nearby Wes Greenway's Volkswagen dealership in Alexandria, Virginia.

After much hassle, the dealership allowed us to bring home the sales paperwork so we could read it over without the salesman hovering over us. Everything seemed to be above board until we got to the end of the buyer's order and discovered that if we signed the contract, we would waive our rights to sue the dealership in court, before a jury, should any dispute arise after the sale. Instead, as a condition of buying the car, we had to agree to submit to mandatory pre-dispute binding arbitration, handled by the dealership's pre-selected company, the National Arbitration Forum (NAF).

After learning this, we called our sales guy, Carlton Cotton, and told him we wouldn't agree to an arbitration clause, but if they took it out, we'd write a check. "That's not negotiable," he said. Cotton explained that the dealership inserted the clause to make things simpler for everyone. "We think it's fair," he said, and then went on to inform me that we wouldn't be able to buy a car anywhere without agreeing to arbitration. Clauses like this are standard fare in car contracts throughout the region, he told us, so we should just sign the contract or lose the car to another customer.

So we walked. Because there is nothing fair about mandatory arbitration.

In its early incarnation, arbitration was designed as a way of resolving disputes outside of the courts, and it's often still used that way when both parties agree to it. But the mandatory arbitration provisions in consumer contracts are very different animals. As I discovered, they aren't voluntary, especially when an entire industry has adopted them, making individual legal rights all but meaningless. These sorts of provisions, buried in the fine print of consumer contracts, have become de rigueur in everything from employment contracts to cell phone agreements to software licenses. Most people don't even realize they've signed one. They really only come into play if a customer is defraudedfor instance, if the "certified pre-owned" car we were buying turned out to have been totaled by its previous owner, the source of many lawsuits these days.

Mandatory arbitration clauses are designed to take fraud cases into a world of private justice, where big corporations hire the arbitrators that hear their cases and there's no right to appeal. Most importantly, unlike court proceedings, arbitration is secret, with no transcripts or written decisions, so that nosy reporters or other potential plaintiffs can't learn what's going on behind closed doors.

That, of course, is why car dealers and other corporate actors like them so much (companies like Hooters, for instance, which puts arbitration clauses in its employment contracts so sexual harassment cases won't go to a jury). Car dealers are eager to avoid cases like one this year in Baltimore, where a jury awarded over $400,000 to a woman who bought a new car that turned out to be used. When the car broke down, she called the dealership, which told her to have it towed to the lot where they'd give her a loaner. When she showed up with the car, and her 11-year-old child with her, the dealership tried to have her arrested for trespassing and then moved her disabled car to a tow-away zone. "The jury didn't like them," says her lawyer Peter Holland.

Arbitration seriously tilts the playing field in favor of businesses. Companies like the NAF, which our Volkswagen dealership used, market themselves to businesses as an alternative to the "million-dollar lawsuit." NAF rules eliminate many of the protections given to both sides of a dispute in court, things like meaningful discovery. The NAF also permits arbitrators to order losing parties to pay the other side's legal fees, which they do regularly, raising the stakes considerably for anyone trying to find relief from fraudulent and deceptive practices*. And arbitration is extremely expensive. Consumers have to pay the arbitrators just to hear their claims, unlike the public courts, where the taxpayers pay the judges. Arbitrators often charge hundreds of dollars an hour for their services.

All of this is especially nefarious given that the vast majority of consumers who attempt to seek justice in mandatory arbitration lose. The nonprofit consumer group Public Citizen recently analyzed data the NAF provided to the state of California, one of the few states that actually requires arbitration firms to disclose information about their results. Public Citizen found that in 94 percent of 19,000 cases, NAF arbitrators ruled in favor of the businesses that hired them. One arbitrator handled 68 cases in a single day, awarding every penny that the big companies were seeking. In one case Public Citizen looked at, the NAF also charged $1500 for a three-page document explaining the arbitrator's decision, something unheard of in regular courts.

"Consumer outcomes in arbitration are the same as in court," says Roger Haydock, the NAF's managing director. "Every published study and all empirical data indicate consumers prevail at a rate that is greater than or equal to litigation, where similar subject matter is at issue. Evaluating arbitration outcomes is only meaningful in comparison with court outcomes of similar cases."

Even if consumers did fare just as well in arbitration as in courta notion that's hotly disputed by consumer advocatesthere is still one fundamental difference between forced arbitration and a traditional lawsuit that's not in dispute: the absence of any meaningful judicial review. If a jury or a judge gets it wrong, a decision in court can be checked by a higher power. Courts have ruled that however wacky the rulings, arbitration awards can't be appealed.

The NAF is one of the biggest players in the arbitration world, but it is far from alone. The American Arbitration Association (AAA) handles disputes with big firms like Halliburton, which places arbitration clauses in its employment contracts, and the drug company Pfizer. Halliburton won 32 out of 39 cases arbitrated against it by an employee over a four-year period, according to Cathy Ventrell-Monsees, an employment lawyer who testified at a House committee hearing last month on arbitration. Pfizer did even better, winning 97 percent of its cases over a four-year period, according to Ventrell-Monsees.

One reason businesses often come out on top in arbitration is that arbitrators who rule for consumers have a tendency to find themselves out of work. Such was the case with Richard Neely, a former chief justice of West Virginia's Supreme Court, who worked briefly as an arbitrator for the NAF. In an article called "Arbitration and the Godless Bloodsuckers," Neely reported that he had refused to award a bank arbitration-related fees that he judged to be far in excess of what a court would have charged. He never got another case. Neely is not alone. A 2000 study of forced arbitration in HMO contracts found that on the rare occasion that an arbitrator made a significant award for a patient, the HMO never hired that person to arbitrate a case again.

Consumer arbitration horror stories abound. Last month, a Maryland woman named Deborah Williams testified at a hearing in the House about her dispute over a Coffee Beanery franchise. Despite the fact that Maryland's attorney general determined that the Coffee Beanery had defrauded her, she was forced into arbitration in Michigan, where the company is headquartered. The Coffee Beanery's attorney actually worked as an arbitrator for AAA, the same firm handling her case, and her arbitrator shared an accounting firm with the company, a clear conflict of interest. Despite the decision from Maryland's attorney general, the arbitrator ruled against Williams, assessed her $100,000 for the cost of the arbitration, a $150,000 judgment to be paid to Coffee Beanery, and ordered her to pay the company's legal fees as well. Williams is now bankrupt and nearly homeless as a result and can't appeal the decision. She will be paying off the award for the rest of her life.

Mandatory arbitration clauses are so insidious that car dealers actually furiously lobbied Congress to get them banned in their contracts with auto manufacturers. The National Automobile Dealers Association wrote members of Congress in 2000 that if they weren't outlawed for the dealerships, mandatory binding arbitration clauses would allow "multinational motor vehicle manufacturers to be able to unilaterally deny small business automobile and truck dealers rights under state laws that are designed to bring equity to the relationship between manufacturers and dealers." Congress agreed and passed legislation protecting the dealers. Apparently, though, the car dealers didn't see a problem in using the same sort of underhanded contracts with their own customers. (Some of them may also be forced to use the clauses whether they like it or not. Several major auto manufacturers' credit divisions have told their dealers that they won't provide financing to any dealerships that don't have arbitration clauses in their sales contracts, says Paul Bland, a lawyer and expert on arbitration at the nonprofit law firm Public Justice.

With the new Democratic Congress, a movement is afoot to get rid of the provisions for everyone. Consumer advocates have started small. For instance, last year, when Congress passed the Defense Department appropriations bill, it outlawed arbitration clauses in lending agreements made to members of the military and their dependents. Senator Charles Grassley, the Iowa Republican, has included a measure to ban arbitration clauses in contracts between poultry farmers and big buyers like Tyson and Perdue. The anti-predatory-lending bill just passed by the House also included a measure that would prohibit mandatory arbitration clauses in residential mortgages. Congresswoman Linda Sanchez is working on a bill that would extend the protections given to car dealers to their customers in auto sales and leasing agreements.

Meanwhile, Senator Russ Feingold (D-Wis.) and Rep. Hank Johnson (D-Ga.) have introduced legislation that would amend the Federal Arbitration Act to get rid of mandatory, pre-dispute arbitration clauses in all consumer and employment contracts. That bill has the business community mobilizing against it, in part because there is some hope it could pass. The arbitration issue is not strictly a partisan one. When the House held hearings on Johnson's bill, several of the witnesses who spoke in support of the legislation were longtime Republicans, including Deborah Williams, the former Coffee Beanery franchisee, and Ken Connor, a movement conservative who was Jeb Bush's lawyer in the Terry Schiavo case and a former head of the Family Research Council. Connor represents the victims of nursing home abuse, many of whom have been forced to sign mandatory arbitration clauses when getting admitted into a home.

Larry Akey, a spokesman for the U.S. Chamber of Commerce's Institute for Legal Reform says that the business community is already laying the groundwork for an ad campaign and other lobbying efforts to educate the public about its position. "Efforts to force people to hire attorneys for even the smallest dispute are wrong," he says, noting that consumers don't need a lawyer in arbitration. Akey says that the movement to ban arbitration clauses is not driven by consumers but by trial lawyers. "The real motive on the part of the trial bar is to wipe out prohibitions on class actions, not to protect consumers."

Given the fight ahead, there's not much hope that Congress will get anything done before I need to buy a new car. Thank goodness for Craigslist.

*Correction: This article originally stated that the NAF requires losing parties to pay the other side's legal expenses. The NAF permits arbitrators to make that determination, but doesn't require it.